Capitalism: A Very Short Introduction by James Fulcher

Capitalism: A Very Short Introduction by James Fulcher

Author:James Fulcher
Language: eng
Format: epub, pdf
ISBN: 9780198726074
Publisher: OUP Oxford
Published: 2015-04-15T04:00:00+00:00


Other important changes in management reversed the ‘managerial revolution’ of the early 20th century. The greater mobility of capital, popular investment in the stock market, and the expansion of the financial services industry increased the importance of a company’s market valuation. According to the newly fashionable doctrine of ‘shareholder value’, the goal of management was no longer to invest in the future or build up a company but only to maximize its share price by increasing profits. Managers were given an incentive to do this through stock options which rewarded them for increases in their company’s share price. Managers had been at least to some extent separated from owners by the managerial revolution, but now they increasingly became owners again.

The focus on shareholder value could lead companies to divert their operations into complex financial activities and the fraudulent inflation of their share prices. Enron started in 1985 as a company engaged in energy distribution but then diversified into trading over 800 commodities and financial products. It borrowed large sums from investment banks, which recommended its stock to their clients, and it inflated its profits through fraudulent accountancy, eventually going bust in 2001. In another famous scandal, WorldCom, which started as a small Mississippi phone company in 1983, bought sixty companies in financially complex transactions, engaged in accountancy fraud to inflate its profits, and went bust in 2002.

Investment banks were also heavily implicated in the dot.com bubble that burst in 2000, by launching and floating internet companies, pushing up their stock prices, making money from their holdings and all the financial activities that this process involved. It was the ordinary investors who paid the price when the bubble burst.

These scandals and malpractices were blamed on the behaviour of deviant individuals or the foolishness of investors. Geoffrey Ingham has argued that they were actually symptomatic of ‘the financialization of modern capitalism in the sense of the increasing dominance of financial practices and the fusion of business enterprise with financial engineering’. American capitalism was transformed by financialization during the last quarter of the 20th century. At a time when companies engaged in production were facing growing competition from abroad and struggling to make profits, financial activities were highly profitable and attracted capital.

Indeed, it was arguably in this area that the remarketizing of American capitalism had its most significant consequences through the deregulation of financial activities. American banks were ingeniously creating many new financial products, such as ‘derivatives’, of the kind that Nick Leeson traded (see Chapter 1). Derivatives were initially banned by the regulatory authorities, which regarded trading in them as illegal gambling activities, but under Wall Street pressure regulations were changed or lifted to allow this to take place.

The repeal of the 1932 Banking Act marked the victory of neo-liberal deregulation. This Act had been passed to separate commercial from investment banking. By the late 1970s, under pressure from the banks, the Act was being reinterpreted to allow commercial banks to invest in derivatives. It was increasingly argued that the Act’s restrictions weakened the international competitiveness of American banks.



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